Considerations at the
Intersection of
Bankruptcy & Divorce
Jessie Lundberg
Lundberg Law Office PLLC
Overview:
O Bankruptcy basics
O When bankruptcy should/could come first
O When divorce should/could come first
O Filing together vs. filing separately
O When one spouse or ex-spouse files on their
own – before, during, or after divorce
O Considerations in drafting the marital property
settlement agreement & support
O Attorney fees
O Protecting your client’s best interests
O Seeking expertise
Bankruptcy Basics
O A married person can file jointly with spouse, or
individually
O Upon filing, an “automatic stay” goes into place
against most creditors, with exceptions for certain
issues re: divorce/domestic support obligations
O Each Debtor gets property exemptions, some double
for married couples, some not:
O Homestead: One only. Up to $250k
O Vehicles: $2500 per debtor, one vehicle per debtor,
but can’t stack in one car.
O Personal property: $4500 per debtor, $600 limit per
item.
Basics Cont’d
O Chapter 7 = liquidation of any non-exempt
property; discharge in 3-4 months.
O Chapter 13 = payment plan over 3-5 years;
must have disposable income; best option
to address arrearages on secured property
like house or car; must pay all secured debt
& priority unsecured debt; discharge of
some or all unsecured debts at end.
Debt Hierarchy
O Secured: secured by collateral such as home
or car; e.g., mortgage or car loan.
O Unsecured Priority: no collateral, but given
special treatment:
O Taxes less than 3 years old
O Domestic support obligation
O Unsecured: bottom of the barrel: medical
bills, credit cards, personal loans.
The Easy Way:
Filing bankruptcy together before divorce
O Reasons for filing joint bankruptcy before
divorce:
O Both parties think they will ultimately have to
file bankruptcy
O Parties can cooperate in filing bankruptcy
O Most or all marital /individual assets are
exempt – i.e., Chapter 7 = 4-month delay in
filing for dissolution
Benefits of Bankruptcy
before Divorce
O One fee ($1500 -$1700 legal fee, $306
filing whether joint or individual)
O Simplifies marital settlement agreement by
clearing most or all debts that would have
needed to be divided
O Prevents common post-divorce problem of
one spouse being ordered to pay a joint debt
and then not paying it
Reasons to File Divorce First
O Only one spouse would benefit from
bankruptcy
O Combined income too high to file a Chapter
7 and divorce could help one or both parties
avoid Chapter 13.
O Too much non-exempt property; each
spouse needs own separate exemptions
O One spouse needs immediate marital
settlement & payment of support for self or
children; bankruptcy will likely delay
When One Spouse is
Uncooperative
O What if one spouse won’t agree to a joint
bankruptcy before divorce?
O Other spouse can file on own; will be discharged
from individual AND joint debts
O Non-filing spouse will remain liable for entirety of
joint debts; creditors can continue collection
efforts
O Court in subsequent divorce case cannot order
filing party to pay the debt, and cannot keep
creditors from pursuing the non-filing party for the
debt – no jurisdiction over federal bankruptcy law.
O Non-filing spouse may wish to join after all.
Uncooperative Spouses Cont’d
O What if one spouse files bankruptcy in the
middle of the divorce?
O Financial matters of the marital property
settlement will be stayed under “automatic
stay” provision of bankruptcy code, unless /
until lifted by bankruptcy court.
O Non-financial matters such as parenting plan
would not be stayed.
Applicable Automatic Stay
Exceptions – 11 USC 362(b)
(b) The filing of a petition … does not operate as a stay—
O (2) under subsection (a)—
O (A) of the commencement or continuation of a civil
action or proceeding—
O (i) for the establishment of paternity;
O (ii) for the establishment or modification of an order for
domestic support obligations;
O (iii) concerning child custody or visitation;
O (iv) for the dissolution of a marriage, except to the
extent that such proceeding seeks to determine the
division of property that is property of the estate; or
O (v) regarding domestic violence.
Bankruptcy after Divorce
O What if an ex-spouse files for bankruptcy after a divorce?
O Filing spouse may discharge joint debts assigned to him or her in
marital settlement, wipes out liability to
creditors
.
O Non-filing spouse will remain liable for joint debts to
creditor
(judge
can only assign liability between the two spouses; doesn’t change
contract with creditor).
O Does not wipe out filing spouse’s obligation to the
non-filing
spouse
, cannot discharge obligations between spouses set forth in
marital settlement.
O Non-filing spouse can seek relief from court of dissolution to
enforce filing spouse’s obligations under divorce decree, or may
wish to file own bankruptcy.
O Bankruptcy court will not revisit issues of marital property division;
lacks jurisdiction. In re Cini (court wouldn’t revisit marital property
division disputed by ex-husband); In re Zrubek (court won’t rewrite
prior award of percentage of military pension to ex-wife)
Domestic Support Obligations
O Bankruptcy code prohibits discharge of:
O “domestic support obligations.” 11 USC 523(a)(5); and
O “to a spouse, former spouse, or child of the debtor and not of the
kind described in paragraph (5) that is incurred by the debtor in
the course of a divorce or separation or in connection with a
separation agreement, divorce decree or other order of a court of
record, or a determination made in accordance with State or
territorial law by a governmental unit.” 11 USC 523(a)(15).
O Clearly covered: court-ordered child support and alimony
payments labeled as such.
O Non-filing ex-spouse generally will not need to take any action
in bankruptcy case to enforce this.
O Bankruptcy’s “automatic stay” does not apply to collection of
ongoing child support/alimony.
O Stay will stop garnishment for arrearages though, at least
temporarily.
Trickier Domestic Support
Obligations
O What if it is not clearly called support? I.e., award of
property/assumption of debts.
O In determining whether obligation is intended for support of former
spouse, and therefore not dischargeable in bankruptcy, court must
look beyond language of decree to intent of parties and substance
of obligation. 11 U.S.C.§ 523(a)(5)(B).
O E.g., In re Lightner – “Debtor's assumption of marital obligations
was in nature of maintenance and support and not property
settlement, and therefore, was not dischargeable, where former
spouse had waived maintenance on understanding that debtor
would honor and assume all debts of marriage.”
O In re Smith - “Moneys due former spouse under marital and
property settlement agreement and stock transfer agreement were
not in nature of support or maintenance,” therefore
nondischargeable. Court “not bound by label[s]” but will give them
some weight. Other provision in agreement dealt with child
support & alimony; money/stock was for wife’s joint ownership of
business; payment obligation continued beyond wife’s death.
O If debtor ex-spouse tries to discharge marital
settlement obligation in bankruptcy, even if
obviously non-dischargeable, best practice
for non-filing ex-spouse still to object in
bankruptcy court and argue that obligation
was meant to be for support.
O Do so by filing adversary complaint against
ex-spouse within bankruptcy case.
Can Divorce Attorney Fees Be
Included in Bankruptcy?
O If your client is the one filing bankruptcy:
O May be dischargeable if no lien taken on
proceeds of property settlement award.
O May be nondischargeable if 1) lien
taken/promissory note signed, and 2) timely
proof of claim filed by attorney as creditor. In re
Danelson.
Can Divorce Attorney Fees Be
Included in Bankruptcy?
O If your client’s ex-spouse is supposed to pay your
client’s attorney fees to your client or you:
O Award of fees incurred in divorce or custody
matter may be considered in the nature of
support - i.e., not dischargeable.
O You should receive notice if correctly listed as a
creditor
O If filing ex-spouse listed attorney fee as a “priority
unsecured debt,” you are okay – not trying to
discharge.
O If listed as general unsecured debt - Your client
should object in bankruptcy court (file adversarial
action) and argue that the fee award was a
domestic support obligation.
Planning Considerations
to Avoid Complications
O In drafting marital property settlement
agreements, clearly label property awards as
“support” to avoid room for argument down the
road
O Include clause that property settlement
agreement may be revisited/modified
O Encourage clients to consider working together
to file bankruptcy, in both spouses’ financial
best interests
O If non-client spouse is talking about bankruptcy,
take into consideration when negotiating division
of any joint debts
Sample Marital Property
Settlement Language
In the event of the declaration of bankruptcy by the Wife
or Husband, the party filing bankruptcy shall continue to
remain personally liable to the non-filing party for any
obligations the filing party was ordered to pay as part of
this Agreement. It is the intention of the parties that any
bankruptcy filed shall be effective as against the
creditor only, but shall not be intended to act to the
financial detriment of the other spouse. The parties
further agree that in the event a bankruptcy filing by
either spouse causes financial detriment to the non-
filing spouse, any provisions in this Agreement
regarding equitable distribution and/or alimony shall be
modified to compensate the non-filing party for the
financial loss.
When to Seek Expertise
O Always in client’s best interest.
O Two-Way Street – most family law attorneys
aren’t fluent in bankruptcy and vice versa,
with huge pitfalls
O Find a go-to attorney to swap consulting if
not doing already.
Questions
Jessie Lundberg
Lundberg Law Office PLLC
jessie@lundberglawyer.com
www.lundberglawyer.com
